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CEO to Worker Pay Ratio-Get Over It

AKA I’m putting on my capitalist hat

I have been reading so much lately on the CEO to worker pay ratio numbers, and frankly it’s making me sick. I’m channeling the devil-may-care attitude of Tim Sackett today, so I’ll probably make half of you mad at me. You’ll get over it and we can still be friends. Promise. :-)

There are several common threads to the stories about the ratio of CEO pay to worker pay, fairness and envy being the most often. I think the arguments are irrelevant at a minimum and an attempt to stir up class warfare at worst. Let’s look at each of the issues above and how they play into the CEO to worker pay disparity discussion.

Hint: life isn’t “fair”

Some calculations put the CEO to worker pay ratio at 300+ times the average wage earner. While that might on its surface seem unfair, consider the fact that the CEO of a company like Wal-Mart makes decisions on a daily basis that impact the future profitability of the company. The average worker does manual labor or customer service work. Not exactly an apples-to-apples comparison.

I don’t work there and never have, but I would much rather have someone running the organization who brings more value than they cost the company. Trying to use the executive pay ratio is just an easy way to stir up the masses at the low end of the pay scale.

Don’t hate ’em, join ’em!

The (easy) and popular thing to do is talk about how selfish and greedy corporate executives are.

So. What.

The majority of the time it’s just some guy (or gal) trying to work and do their job well. Yes, they get paid a considerable amount of money for what they do, but in the end they are still people who have hopes and dreams when it comes to the work they do. Instead of trying to use envy as a wedge between “us” and “them,” why not seek out ways to become like them?

That brings to mind a quote I’ve heard before: jealousy is wanting what someone else has–envy is wanting to take it away from the other person because you think it’s out of your reach.

Not everyone is motivated and driven to become a highly compensated executive. But you shouldn’t hate those who are. If you’re that jealous of what they have, learn how they became successful and follow in their footsteps.

That goes for nonprofits, too

I often read the work of Harvard Business Review author Dan Palotta. He recently wrote “An Executive Pay Witch Hunt,” detailing New York Governor Andrew Cuomo’s attacks on nonprofits for paying their executives “high” salaries. I look at it this way: if a nonprofit can help a thousand homeless people in their current operating state, but they can hire a better (and more expensive) CEO whose leadership and guidance allows them to help ten thousand homeless people, then why ridicule them for making that choice? Again, this ignores the small percentage of organizations and people who defraud others and behave unethically, because that’s an entirely different discussion.

All said, I’m a fan of the government staying out of the way as long as a business is operating within the confines of the law, and that “staying out of the way” involves executive compensation and the CEO to worker pay ratio, too.

First, research has long demonstrated that people have a strong sense of distributive justice. Workers don’t resent people earning more if performance justifies it. If the performance standards are clear, and I was outperformed by another worker, and that worker earns more, I perceive that as fair.

Workers see record profits for the company while seeing wage freezes or 1% raises.

Workers see multimillion bonuses for executives, while seeing their health care plan have double-digit premium increases for the fifth straight year.

Workers see CEO pay increase yet again while the merit pay budget is under 5%

Workers see greater deductibles and increased co-pays while company coffers burst with unspent money.

There was a time when companies paid 100% of health care expenses, offered strong defined benefit plans with guaranteed payouts, and when the company did well, the success was passed down (trickled down if you will) in the form of an increase in take-home pay.

Workers don’t care if the pay ratio is 200-1, 300-1, or 400-1, if they are seeing gains as well.

Very engaging post! I largely agree with what you’ve said, with a minor exception. That is, I do believe that some CEO’s are paid excessively relative to the value/performance that they demonstrate. That being said, that issue is the concern of the company’s Board (and indirectly the shareholders) — and “shame on the board” if they aren’t evaluating the CEO rigorously and are over-paying them relative to his or her value.

I would add a counter-point question to all of this, which is: As HR people, what SHOULD we be focusing on relative to pay? For me, the answer to that question is … we should be working to ensure that employees at all levels (from first-level, front-line employees on up) are paid appropriately with regard to the market value of the work they do and their individual contribution (performance) to the company. That’s an obvious statement, of course — but the point is, the company may have a lot of issues that we CAN influence (such as turnover due to salaries being below market levels in certain jobs or departments or locations in the company). It’s our job to identify and fix those issues — which seems a better place to spend our energies.

Worker to executive pay is only fair if worker to executive return is also considered. It is clear from significant research (much of which is in the area of engagement) that most workers barely break even in terms of the return on the cost of employing them. Executives that drive the company to multi-billion dollar returns annually are worth hundreds of times their pay. As long as the return is there, I have a difficult time imagining a reasonable argument to drop CEO pay. Of course, folks are always welcome to migrate to the government where tenure alone is the major differentiating factor and executive pay levels are achievable for anyone wh sticks around long enough!

Another thing to consider in this debate, in particular in response to @akaBruno ‘s point about the rise in CEO pay versus worker pay is that in that same time period, complexity of running an organisation has increased immeasurably (generally greater geographic coverage, longer supply chains, more complicated communication systems etc), whereas the entry level jobs have largely stayed the same, perhaps in some cases become less skilled.
Interesting post. My stance might be slightly less harsh overall, but well thought out and argued.

The first of all, I will echo what a previous commenters said about boards of directors. All too often these board members may have some bias or conflict of interest, such as the CEO being on their board and determining their pay. History is replete with exmaples of pieple who, once they have power, moving to consolidate it. I think he would be naïve of us to think that boards of directors are not swayed by old school ties and other such political considerations in hiring chief executives and determining their compensation.

That said, if adequate chief executive officers are so rare that they have to be paid such astronomical fees relative to the rank-and-file employee, assuming they are in fact “worth it,” I must say, this is a pretty poor commentary on our business school education system, and the company’s exec training itself, if it is turning out so few people capable of running a large company, that there are only a handful of people who can actually do it.

And my third and final point, have you spent very much time in Latin America? The extreme disparity between rich and poor has been there a lot longer. In Rio de Janeiro, wealthy people cannot wear any jewelry when they walk on a public street, as the likelihood of it being stolen from them is so high. When driving at night, no one stops at red lights, because it makes one will vulnerable to carjacking. I have a friend in São Paulo Brazil who does not use her last name in any of her social media, as doing so would make it more likely that she would be vulnerable to robbery or kidnapping.

I visited a friend of the Bahamas recently. Again, a country with a great division between rich and poor. Crime is high as a result. Every single house in Providence has at least one large nasty guard dog living in the front yard. It’s not what you will call a friendly community feel.

At the moment, we are still benefitting from having a relatively stable society without too much disparity between rich and poor, but it doesn’t matter whether you and I are envious of wealthy people, the fact is, there are people who are, and if that disparity becomes great enough for long enough, there is a certain number of people who will take the Robin Hood approach, and a great deal of collective wealth will be lost.

There’s more to the business world and just making money. It is based upon, and has a responsibility to maintain, the broader community as a whole. If some people really are worth $50,000 a day, while others are worth $50 a day, even if the market says this is right and fair, there is something very wrong with a system that maintains such large inequality when we are only .1% different from each other on a genetic level. Remember the 4-way test of Rotary Clubs: “Is it fair for all concerned?” –jl

Finally somebody that I agree with on that matter! The stress and the things you are doing on day-to-day basis as an CEO are unbearable things for many. They seem MUCH easier than they truly are. You have to be specially talented to be able to work on that sort of position and that means that you are worth a lot more money.